How Inflation Affects Car Loan Rates – Bankrate.com | CarTailz

Unfortunately, inflation and its effects are unlikely to go away anytime soon. According to Bankrate’s third-quarter economic indicator survey, 43 percent of economists agreed that inflation will become more important over the next 12 to 18 months. With inflation likely yet to have peaked, it’s an important time to prepare for its impact – one of which is higher interest rates.

How the Fed affects car loan rates

The Federal Reserve doesn’t directly affect car loan rates — but it does affect the cost for lenders to borrow money. A hike in the Fed rate usually means lenders are quick to follow.

Federal Reserve decisions affect the benchmark interest rate, which has a knock-on effect on vehicle financing costs. Although a driver’s interest rates depend on several factors — including a borrower’s credit history, term, vehicle type, and more — increased inflation means higher interest rates for drivers, even with perfect credit.

“One of the Fed’s main jobs is to keep purchasing power in check, and it does that by raising interest rates,” said Sarah Foster, senior US economics reporter at Bankrate. To achieve this goal, the Fed raised interest rates again in November and set the base rate at 3.75 to 4 percent. This surge comes as supply chain issues keep vehicle prices high, averaging above $48,300 in August, according to the Kelley Blue Book.

These rising interest rates make borrowing more expensive, Foster explains. This makes financing costs for vehicles dramatically higher than in previous years. Since early 2022, average vehicle interest rates have risen: 1.77 percentage points for a 60-month new-car loan and 1.78 percentage points for a 48-month used-car loan, according to a national Bankrate interest survey.

Higher interest rates are just one result of the Fed’s goal of suppressing inflation. “Higher borrowing costs not only reduce the incentive to buy, but also discourage people from being able to afford high-priced items, leading to a slowdown in the economy,” says Foster.

“The hope is that these higher interest rates will eventually dampen demand enough that inflation will eventually come down,” says Foster. But this desire is not associated with risks: “A consumption-hungry economy often means a recession that nobody enjoys.”

Against this backdrop, drivers will face higher interest rates as the Fed continues to control high inflation. Now is the time to prepare for rising costs.

08/10/2022 Interest rate for a 60-month new car loan 4.94%
10/12/2022 Interest rate for a 60-month new car loan 5.56%

As shown above, interest rates have risen significantly since August in line with Fed meetings. In addition to more expensive vehicles, this increase is due to the higher reference rate. Stay up-to-date on changing news and how it’s affecting your finances at Bankrate’s Federal Reserve Hub.

While the interest rate you get depends on many factors, including uncontrollable factors like inflation, there are still steps you can take to save money regardless of Fed rate hikes.

shopping spree

Most lenders will have higher interest rates right now, but that doesn’t negate the benefit of shopping. Compare interest rates and terms from at least three lenders to decide which offer best suits your needs. Pay close attention to the available APR along with the repayment period.

Calculate the actual operating costs

With vehicle prices hitting record highs, it’s important to focus on your budget when shopping. Without much wiggle room, your best bet is to calculate how much you can really afford before heading to the dealership. This way you will know how much you need to borrow to be able to drive your new car.

Bank rate tip

Be sure to shop for the entire loan amount, not just the monthly installment. While it can be tempting to take out a loan with a longer term and cheaper monthly costs, it can become more expensive in the long run.

Think of an electric car

The initial cost of an electric vehicle tends to be higher, but they offer additional benefits off the pump. Applying for a green car loan and getting EV tax credits can help you recover money that might be lost due to higher interest rates.

Secure the funding you expect

One of the surest ways to get a good deal is to apply for a loan pre-approval, which will give you an accurate idea of ​​what your expected interest rates will be. Not all lenders offer this step, so keep that in mind when shopping.

Buy used cars

Unfortunately, both new and used vehicles currently have higher than usual prices, but used are slightly lower. If you are flexible about the type of vehicle you want, buying a used vehicle can save you money on your monthly expenses.

One of the most effective times to consider refinancing your car loan is when interest rates have fallen and your credit score has improved. The process is quite similar to the steps involved in applying for your first loan.

  1. Evaluate the current loan. Before you start refinancing, it is first important to look at your current loan, both the terms and the exact interest rates. Use an automatic refinance calculator to understand the potential monthly savings once you get your head around these numbers.
  2. Check your credit. By understanding your credit score, you can determine where you end up in terms of available lenders. When it comes to refinancing – as with any loan – the better your credit rating, the more competitive your rates will be.
  3. Determine vehicle value. Depending on the value of your vehicle, refinancing may not always be the best financial move. If you have almost paid off your vehicle, it is not advisable to refinance it.
  4. Shopping spree. Comparing at least three different lenders is key to getting a good deal. A good place to start is with the bank or lender you originally signed up with – there may be discounts for existing customers. Not all lenders will let you refinance an existing loan.
  5. Get new terms. After submitting the required documents and, if applicable, paying a prepayment penalty, you will receive your new conditions. Before you close the chapter on this process, make sure you pay off your previous lender.

Now may not be the best time to buy

While many don’t have the luxury of waiting to buy a car, patience can be on your side when it comes to saving money now. Interest rates, which are likely to rise further after the next Fed meeting, and high vehicle costs make buying now a challenging time. Instead, consider waiting for prices to cool down.

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